If you search internet, you will find so many articles comparing ULIP & Term insurance. Some describes ULIPs cheaper then combination of term insurance and mutual fund & others oppose it. Some of these articles are written by marketing agents, having vested interest in selling their products.
After reading so many of these articles, I am also trying to evaluate my term insurance policy taken 2 years back. I had taken this term insurance policy from SBI Life at age of 28 years for a term of 25 years. Premium for policy with 15 L sum assured was 4,284/-(net of all taxes including service tax). I had chosen SBI Life for buying this policy as the premium was lowest among all insurance companies.
I will compare this policy with mortality charges of ULIP(just mortality charges & not including any other charge of ULIP) for complete term of 25 years as I will continue paying premium for complete term so that my nominee get 15 Lakhs over & above my saving through other instruments.
Most of the ULIP provide higher of fund value and sum assured on death of life assured. So in initial policy years, nominee(on death of life insured) will only get sum assured and once fund value crosses sum assured, ULIP is no longer an insurance policy but a costly mutual fund. For the initial years, actual sum assured in this policy decrease with time & so the mortality charge also decreases but due to this, nominee never get both Sum assured and fund value in this type of ULIP. We can not compare this type of policy with Mutual Fund + Term insurance Combination.
Now, in case someone opt for Mutual fund + term insurance strategy in his financial planning, nominee gets fund value of his mutual funds & sum assured from the term insurance policy. To compare mortality charges of ULIP & term insurance, you will have to select a ULIP which provide both fund value and sum assured on death of life assured. In this type of ULIP, mortality charges on whole sum insured amount is deducted for complete term of the policy. As mortality rate increase with age, total mortality charges also increase with each policy year in this ULIP. In case of term insurance, premium is same for all policy years.
To illustrate the difference between the mortality rate & term insurance premium, I have compared mortality charge of an ULIP policy from SBI Life & my term policy from same insurer in the table below.
In the above table, one can verify that Premium of the term insurance policy is more then Mortality charges of ULIP in the first 13 years (positive annual Excess paid value) & less in the last 12 years (negetive annual excess paid value). In the last column, I have compounded the excess paid amount at interest rate of 8%. At the end of 25 Years, I found that I am paying 17,177.89/- more in case of term insurance.
Now I can not simply divide this amount by 25 to get an average annual excess amount of 687.11/- . I am paying this accumulated excess amount in 25 years at 8% interest rate & so I will have to calculate the excess also considering 8% interest on it. After some calculation, I arrived at a figure of 217.58/- . So I am paying 217.58/- Rs extra and this amount is accumulating to 17178/- at the end of 25 Years.
Now if I analyse my term insurance, I found that in addition to average mortality charge, I pay Rs. 217.58/- extra on my premium of 4284/-, which is just 5% of premium. Shouldn't I pay this much of administrative cost for my policy in addition to mortality charges.
If I assume more conservative rate of 7% interest for such a long period of 25 years, then this compounded excess amount comes to 4973/- & average excess amount to just Rs. 73/-. Term policy will prove to be cheaper if I assume less then 7% rate of interest.
In above calculation, I have not considered any other ULIP costs that I will have to bear (Fund Allocation charge & Policy administration charges). In mutual fund I can save the entry load (by investing directly) & exit load (by not exiting during the mentioned time). NAV is already calculated net of fund management charges in both mutual fund & ULIP & I do not need to consider these charges in case of comparing the returns.
With above calculation, I can safely back my decision to continue with my term insurance, assuming I pay the premium for complete term of policy (which I have already decided).
After reading so many of these articles, I am also trying to evaluate my term insurance policy taken 2 years back. I had taken this term insurance policy from SBI Life at age of 28 years for a term of 25 years. Premium for policy with 15 L sum assured was 4,284/-(net of all taxes including service tax). I had chosen SBI Life for buying this policy as the premium was lowest among all insurance companies.
I will compare this policy with mortality charges of ULIP(just mortality charges & not including any other charge of ULIP) for complete term of 25 years as I will continue paying premium for complete term so that my nominee get 15 Lakhs over & above my saving through other instruments.
Most of the ULIP provide higher of fund value and sum assured on death of life assured. So in initial policy years, nominee(on death of life insured) will only get sum assured and once fund value crosses sum assured, ULIP is no longer an insurance policy but a costly mutual fund. For the initial years, actual sum assured in this policy decrease with time & so the mortality charge also decreases but due to this, nominee never get both Sum assured and fund value in this type of ULIP. We can not compare this type of policy with Mutual Fund + Term insurance Combination.
Now, in case someone opt for Mutual fund + term insurance strategy in his financial planning, nominee gets fund value of his mutual funds & sum assured from the term insurance policy. To compare mortality charges of ULIP & term insurance, you will have to select a ULIP which provide both fund value and sum assured on death of life assured. In this type of ULIP, mortality charges on whole sum insured amount is deducted for complete term of the policy. As mortality rate increase with age, total mortality charges also increase with each policy year in this ULIP. In case of term insurance, premium is same for all policy years.
To illustrate the difference between the mortality rate & term insurance premium, I have compared mortality charge of an ULIP policy from SBI Life & my term policy from same insurer in the table below.
In the above table, one can verify that Premium of the term insurance policy is more then Mortality charges of ULIP in the first 13 years (positive annual Excess paid value) & less in the last 12 years (negetive annual excess paid value). In the last column, I have compounded the excess paid amount at interest rate of 8%. At the end of 25 Years, I found that I am paying 17,177.89/- more in case of term insurance.
Now I can not simply divide this amount by 25 to get an average annual excess amount of 687.11/- . I am paying this accumulated excess amount in 25 years at 8% interest rate & so I will have to calculate the excess also considering 8% interest on it. After some calculation, I arrived at a figure of 217.58/- . So I am paying 217.58/- Rs extra and this amount is accumulating to 17178/- at the end of 25 Years.
Now if I analyse my term insurance, I found that in addition to average mortality charge, I pay Rs. 217.58/- extra on my premium of 4284/-, which is just 5% of premium. Shouldn't I pay this much of administrative cost for my policy in addition to mortality charges.
If I assume more conservative rate of 7% interest for such a long period of 25 years, then this compounded excess amount comes to 4973/- & average excess amount to just Rs. 73/-. Term policy will prove to be cheaper if I assume less then 7% rate of interest.
In above calculation, I have not considered any other ULIP costs that I will have to bear (Fund Allocation charge & Policy administration charges). In mutual fund I can save the entry load (by investing directly) & exit load (by not exiting during the mentioned time). NAV is already calculated net of fund management charges in both mutual fund & ULIP & I do not need to consider these charges in case of comparing the returns.
With above calculation, I can safely back my decision to continue with my term insurance, assuming I pay the premium for complete term of policy (which I have already decided).
i agree with you and wait for your next article
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